[Congressional Record (Bound Edition), Volume 147 (2001), Part 8]
[Extensions of Remarks]
[Page 11501]
[From the U.S. Government Publishing Office, www.gpo.gov]



   A BILL TO PERMIT COOPERATIVES TO PAY DIVIDENDS ON PREFERRED STOCK 
                  WITHOUT REDUCING PATRONAGE DIVIDENDS

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                           HON. WALLY HERGER

                             of california

                    in the house of representatives

                        Thursday, June 21, 2001

  Mr. HERGER. Mr. Speaker, today I rise to introduce the Cooperative 
Dividend Equity Act. This legislation will help to end an unfair tax on 
cooperatives and their members.
  As those of us from agricultural and rural areas can attest, 
cooperatives play a vital role in many Americans' lives. Whether it be 
farmers pooling their resources in order to survive in the global 
marketplace, consumers maximizing their buying power through volume 
purchasing, or healthcare facilities providing community-based 
services--cooperatives facilitate people working together for a common 
good.
  One of the greatest challenges facing cooperatives today is access to 
capital. In order to raise much needed capital and avoid further debt, 
many cooperatives are considering issuing preferred stock. However, 
under the current tax laws, stock dividends paid to stockholders are 
taxed three times: (1) when they are earned by the cooperative; (2) 
when received by the stockholder; and (3) at the corporate level when 
earnings are distributed. Three levels of tax on the earnings of a 
cooperative! Here is how it works.
  Members of cooperatives are taxed on income generated by the 
cooperative. The cooperative itself, however, is not taxed so long as 
any ``patronage income'' is distributed to its members. Cooperatives 
frequently earn at least some non-member, or ``nonpatronage,'' income. 
Much like a corporation, a cooperative must pay taxes on such non-
patronage income, just as the stockholder (whether a member or non-
member) must also pay tax on that income when it is distributed as a 
dividend. Unlike a corporation, however, cooperatives must then pay 
what amounts to a third tax due to the operation of an obscure IRS 
rule.
  The ``dividend allocation rule'' imposes a third level of taxation on 
the cooperative by reducing the amount of patronage dividends paid to 
cooperative members. Cooperatives, such as a typical farming 
cooperative, may deduct dividends paid to patrons from taxable income. 
IRS regulations, however, provide that net earnings eligible for the 
patronage dividend deduction are reduced by dividends paid on capital 
stock. This requirement has been interpreted to mean that even 
dividends paid out of nonpatronage earnings will be ``allocated'' to a 
cooperative's patronage and nonpatronage earnings in proportion to the 
relative amount of patronage/nonpatronage business done by the 
cooperative. This ``allocation'' significantly reduces the amount of 
net earnings from the patronage operation that may be claimed as a 
deduction, thus increasing the cooperative's level of taxation.
  Put more simply, the ``dividend allocation rule'' allocates income 
already taxed against what would have otherwise been a deduction. As a 
result, cooperatives pay more taxes on income used to pay a dividend on 
stock than would a non-cooperative corporation.
  It is time to end the triple taxation on cooperative income and give 
farmers, consumers, hospitals, and other coop members the flexibility 
they deserve in structuring their affairs. It is time to eliminate the 
dividend allocation rule and pass the Cooperative Dividend Equity Act 
of 2001.

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